(def.) A business environment defined by (1) an expectation of total informational transparency and accessibility and (2) a requirement for flawless logistics and operations. Named for Google and Wal-Mart. (c)Josefowicz Associates, LLC

FINANCIAL TIMES: Clearly, the dominant business news event this week is your own acquisition of YouTube. Why is user-generated video worth $1.65bn to Google?

ERIC SCHMIDT: Well, on the money side, it’s easy because we have what we think is the world’s best advertising system and we can take that advertising and use that over time to build quite a business off all of the things the users are doing on YouTube. The real reason, however, was not the money, and not even the advertising, it was because we believe that video is going to be, and is sort of already, one of the most important new media types on the internet.

More and more people are going to be doing videos of one kind or another to communicate ideas, sell their product, record their memories, and ultimately a lot of the existing broadcast world that we’re so used to will become available on the internet.

FT: Since doing that deal, you’ve been quite assiduous in going and visiting some of your other big media partners and talked to them about the significance. Has it made them again ask this question that we’ve heard a lot about Google ‘friend or foe?’ and worry about Google moving into content creation.

SCHMIDT: We, of course, want to be their friend. We don’t want it to be Google foe. We see ourselves as a technology provider and a distribution network. We’re not in the content business. And the partnerships that we’ve constructed over the last few years, and especially the ones over the summer, really show the application of our advertising network to the content and media capabilities of our partners. So we want those media partners to put their media content, literally their content, into this emergent new and much larger system as a result of the YouTube acquisition.

FT: You’ve met with some of them already. You’ve met with News Corp executives, you’re in New York, meeting maybe with people maybe from Time Warner. Are they comfortable with that explanation?

SCHMIDT: All of the media companies are dealing with dramatic changes in their business. All of them are looking for a partner. All of them are looking for a way to make money. One of the great news, from our perspective, is people are using this content on the internet. The bad news is it doesn’t make as much money for the businesses. And ultimately the businesses need to make money in order to produce the new content. So what we’re trying to do with all of these partners is to say, ‘if you work with us we can combine our advertising platform and your content with a much larger audience.’ So far people like that message, they are now trying to figure out what to do about it – should they, should they not, under what terms, and those sort of things.

FT: Another new generation internet property which has generated a lot of interest recently is Facebook. Are you thinking about acquiring Facebook? Do you think Yahoo might acquire them?

SCHMIDT: I shouldn’t speculate on mergers and acquisitions either our own possibilities, or competitors’. It’s clear to me that social networks are going to grow and grow quickly. We did a very, very significant deal with MySpace, which we’re very proud of. We think it’s the defining economic deal in that space.

FT: Your acquisition speaks to the tremendous technological change which we’re still really at the beginning of. Are there going to be victims? And which companies might be those victims.

SCHMIDT: You know, every technology dislocation has winners and losers. And the winners are the companies that can adopt these technologies more quickly and the losers are the ones that are stuck, unable to make the transition, unable to take advantage of new technologies. It is clear that the internet and the web and what is generally known as a marketing term of web 2.0 are the defining new technologies. I think that race is underfoot. It’s too early to say who the losers will be. Clearly the winners will include companies like Google and all the other companies that have made their bets on web 2.0.

FT: More broadly, Silicon Valley has been roiled by corporate governance controversies recently. There have been the pre-texting issues at Hewlett-Packard, the backdated stock options issues which have claimed some very senior, long-standing leaders in the technology industry. What kind of an impact is that having on innovation, on people running public companies like yourselves now?

SCHMIDT: It makes people be more careful and I don’t think that’s necessarily a bad thing. Certainly, some of the standards in the past may not have been as tight. Some of this may be revisionist looking back. Certainly the pre-texting was not appropriate because it was a violation of privacy. I think all of that is a sideshow relative to the innovation in the Valley, which is fundamentally created by small teams of people who see the world in a different way. And I don’t see these crisises, these scandals and so forth, as fundamentally changing that.

The story of the Valley is still the same. It’s about small teams doing amazing things with limited resources, often with venture capitalists, creating great companies.

FT: You talk about the innovative tradition of the Valley. More generally there has been a lot of questioning in America right now, about this country’s ability to maintain its competitive advantage in a globalised world with lots of cheap programming talent in other developing countries. Is the Valley still competitive?

SCHMIDT: The Valley is certainly competitive. It would be a lot more competitive if our government would start doing rational things like letting the smartest people in the world come into the United States on H1 visas rather than preventing them from doing so. So a small number of changes from the government, including increasing the funding in basic research and development around computer science and science in general and also trying to make sure the United States remains an attractive place for the best and the brightest. The compound value of that, the innovations and the companies that these, essentially, immigrants create, is a part of the American story.

FT: You made a big impact in Europe recently addressing the Tory party conference. Why did you choose to do that and what kind of a message do you think an innovative American company, like Google, has for Europe? For Britain?

SCHMIDT: It’s interesting that in Britain, of all the European countries, the United Kingdom is one of the best examples of innovation. If you look at the creation of the Cambridge technology centres, all around the research centres that were formed there, the transformation that’s gone on in British society over the last 10-15 years, encouraging innovation, encouraging new capital formation, it’s really an icon for the rest of Europe. And I think that’s wonderful.

My message was a message of optimism. My message was that technology, we’re just at the beginning, and I was not particularly trying to make a partisan comment. Google is certainly not political. And the messages that I gave, and I happened to be invited to [I guess] the conservatives’ party, but I would have given the same speech to any of the other parties and, in fact in any of the other European countries.

The important message is a message of innovation - that if you unleash the human capital that is present in Europe you will get tremendous economic returns for those countries. And that’s the story of America. It’s a story that’s well replicable in Europe.

FT: Thank you very much.

SCHMIDT: Thanks.

FT: And now the prediction.

SCHMIDT: You know there’s a whole new phenomenon. Young people online all the time, communicating in new ways and building new social environments. New enviroments, new friends, new ways in which they interact. All of us will be affected by this in ways I could not possibly predict. Political. Social. Community. New businesses. It’s amazing to watch this next generation spend their time online and change the world.

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